What: Troubled agribusiness Elders Ltd (ASX: ELD) jumped more than 23% on Monday after announcing that it had successfully raised $57 million to reduce debt and grow the business for a profitable future.
On coming out of a trading halt today shares jumped 5 cents to 26 cents each.
So what: Elders ran into trouble over recent years as net debt ballooned to $314.1 million in March 2013. As at March 2014 it stood at $236.6 million of which $118 million was term debt, while almost all the rest was euphemistically described as self liquidating.
Term debt is considered disadvantageous as it is generally paid in one lump sum upon maturity. The debt Elders will carry going forward should generally be able to be repaid on an incremental basis through income generated on assets the the debt has been used to purchase.
The term debt has now been reduced to just $21 million thanks to the capital raising and a series of asset sales including an insurance business, the Charlton Feedlot business and the New Zealand division.
Moreover, the group has agreed total new working capital facilities of $308 million, which in future should exclude term debt borrowings.
What of the outlook: With the business now claiming that it has its debt under control investors will look towards the potential to generate revenues and profits.
Operating as an agricultural supplier and financier in the grain, feed, real estate and livestock sectors, Elders certainly has the tailwinds of booming demand for agricultural produce across Australia and Asia.
Elders has set itself the ambitious target of achieving $60 million EBIT on a 20% return on capital by FY17. In its most recent half year it posted an operating net profit of $6.7 million on an underlying EBIT of $12.4 million. Although a final statutory loss of $10.2 million was the result of legacy issues that may still burden the business.
If it is able to get anywhere near its aspirational forecasts for FY17 then shares will likely seem cheap at today's prices.
Elders remains a highly speculative play under a mountain of debt. If you're looking to make agricultural returns you might be better off looking to well run companies operating in growth sectors with strong balance sheets and big growth potential.
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